Black and Buono Blog

Addressing a group of 200 real estate agents, mortgage brokers, attorneys, home inspectors, and property managers today, Attorney General Martha Coakley highlighted her proposed legislation to address the ongoing mortgageforeclosure crisis that has gripped Massachusetts.

An Act to Prevent Unnecessary and Unreasonable Foreclosures, which is sponsored by Senator Spilka and Representative Walsh, requires that creditors take reasonable steps to avoid foreclosure and prohibits foreclosures without appropriate documentation. The legislation will also prevent additional foreclosures by mandating loan modifications in certain circumstances. AG Coakley discussed the legislation during her keynote address at the North Shore Association of Realtors’ Annual Membership Meeting and Business Expo in Peabody.

“Our communities have been devastated by the housing crisis,” said Coakley. “The proposed legislation will help rebuild our communities by promoting a process in which creditors and borrowers work together. Requiring creditors to take reasonable efforts to avoid unnecessary foreclosure is in everyone’s best interest.”

The legislation targets loans generally considered to have a higher risk of default, such as interest-only loans, adjustable rate mortgages, and loans with short-term introductory interest rates. Under the bill, creditors are required to have appropriate documentation that supports their right to forecloseprior to beginning foreclosure proceedings and are prohibited from passing on certain fees and costs associated with foreclosure to homeowners.
The legislation makes the failure to comply with the law a violation of the Massachusetts Consumer Protection Act.

During this economic crisis, Coakley’s office has brought predatory lending cases against two major subprime lenders, Fremont Investment & Loan/Fremont General and H&R Block/Option One Mortgage Corporation. The Attorney General’s Office has also reached settlements with investment giants Goldman Sachs and Morgan Stanley for their role in securitizing subprime loans.

A strategic default in terms of home ownership is the decision by a homeowner to stop making mortgage payments (to default) on their debt despite having the financial ability to make the payments.

This is particularly associated with residential mortgages. It usually occurs after a substantial drop in the house's price when the debt owed is much greater than the value of the property, meaning negative equity or underwater, and is expected to remain so for the foreseeable future.

Homeownerswho walk away in strategic defaults are not necessarily the ones most 'underwater.'

Credit scores are designed to predict the risk of default. But when it comes to strategic default -- which is when people who can afford to pay their mortgages don't, usually because their homes are worth less than their loans -- analysts have noticed a reverse phenomenon: Good credit scores can indicate a higher likelihood that a homeowner will voluntarily bail on a home loan.

Today, somewhere around one in three mortgage defaults is strategic.

"People who make the decision to strategically default tend to be more savvy," said Andrew Jennings, the chief analytics officer for Fair Isaac, the company that created the leading FICO credit score. "Most of the people who walk away from a mortgage are saying, 'This is not a contract that makes sense anymore.'"

FICO analysts looked at a population of borrowers who started out current on all their bills but wound up 90 days or more behind on their mortgages.

The people who stayed current on their other bills but stopped paying their mortgages had better initial credit scores and lower credit balances, and were less likely to have gone over their limits -- all signs of responsible money management.

Intriguingly, one factor that wasn't a strong predictor of strategic default was how far "underwater" these homeowners were. What mattered far more was the future trajectory of home prices.

Another point: research indicated that 40% of strategic defaulters lived in "recourse" states, where they could face lawsuits over debts that remained after foreclosure. It's not clear whether defaulters didn't understand the risks or whether they had bet that their lenders wouldn't come after them.

“We feel that people take this action without fully understanding the consequences," Jennings said. The message coming from them is that if enough people take this action, there is no way the banks are going to come after us, and even if they do, we can declare bankruptcy."

Strategic default dumps the traditional "payment hierarchy" on its head. In the past, lenders could count on people skipping other payments first before they reneged on their mortgages. And, the trend seems to be growing. A study at the University of Chicago found that 35% of mortgage defaults in the U.S. were strategic in September 2010, compared with 26% in March 2009.

If you're thinking about skipping out on your mortgage, here's what you need to keep in mind:

The foreclosure process varies by state and by lender. Don't count on other people's experiences to predict your own.

Your risk varies. Some states prohibit lenders from suing you for mortgage balances you owe on a primary residence. Massachusetts is NOT one of those states. Massachusetts allows the lawsuits. Before you stop paying, talk to a bankruptcy attorney who is familiar with the credit and real-estate laws in your state as well as industry practices.

Understand what a foreclosure does to your credit. The higher your credit scores, the longer they will take to heal.

Recourse basically means that the lender can come after you (has recourse against you) if your house sold at auction or through a short sale for less than the amount owed the lender.

There are many people across Framingham, Marlborough, Worcester and Natick that think they cannot sell their homes because they owe more than their house is worth. This is called a short sale. You may also hear it referred to as “being underwater”. Many people think they can’t sell their home because the house prices are dropping in their town.

You are not alone in this situation. Due to the downturn in the housing market, there are many home owners who have found themselves in the same situation. The most vulnerable are those who bought their homes within the last five years or so and now need to sell either because of a life change or afinancial problem. Home prices in many cities and towns across Massachusetts are much lower than they were at the peak of the market, and there are associated costs to selling your home.

Much of the time, your lender will want proof that you cannot sell the house for the amount that you currently owe on the property. The lendermay require that you list your house for some amount of time, usually 90 days, before they will consider a short sale or reworking the terms of the note. Mainly, the bank is trying to minimize their loss and assess their risk in re-establishing a new loan for the new buyer.

You should first talk to your lender or bank to see what they require for a short sale. Get everything you can in writing. A real estate attorney can help you with the process. You will need an attorney when the bank is ready or working on accepting the offer.

You most certainly need a realtor to give you a fair market value for your home and then list your home based on the bank requirements.

Short sales can take a lot of time. The negotiation could take months. If you are selling your home as a short sale, you may have a tax liability equal to the difference between your loan balance and today's market value. The debt may or may not be forgiven by the lender, depending on your assets and financial status. This is another reason you should have a real estate attorney involved; you certainly don’t want any surprises after the fact.

At Black and Buono, we are often getting the same question. We have clients who are having trouble paying their bills and they want to know if homesteading their property will protect them from creditors in a lawsuit. We’ve decided to address this in our blog this week.

Massachusetts homestead laws are concerned with protecting a certain portion of the head of household’s property from being confiscated and sold to satisfy debts.

In March of this year, the Homestead Act was changed to allow an automatic homestead of $125,000 without the homeowner doing anything at all, this is an improvement over the past, when no protection was provided automatically. A declaration of Homestead provides for up to $500,000 of protection.

Many homeowners misunderstand the law and think that it provides much more protection than it actually does. For example, under the Homestead law, $125,000 of the equity in your home is protected. Meaning no forced sale can happen to satisfy "unsecured" creditors.

Notice, we said unsecured creditors. The homestead exemption does NOT protect you from secured creditors such as your mortgage holder.

If you stop making your mortgage payments, the bank can foreclose and sell your house. This can happen regardless of a homestead exemption because the mortgage is a voluntary secured lien, which means that you put up your home as collateral when you took out the loan.

However, the homestead law does protect you from unsecured creditors. Therefore, if your only financial asset was $125,000 equity in your home and you owed were sued for a $100,000 judgment the party suing you could not foreclose on your home to collect. Remember, the first $125,000 worth of equity in your home is protected by the Homestead law. The same works for Declaration of Homestead of$500,000 worth of protection.

However, in the above scenario, $125,000 of your home’s equity is protected, and you have $225,000 worth of equity in your home, the party suing you actually could force the sale of your home. In this case, you would receive $125,000 of the sale (which is protected) and they would keep the other $100,000 as payment.

Through these examples you can see the benefit of a Declaration of Homestead, which protects $500,000 of your homes equity.

Unfortunately, mortgage lenders are not the only secured creditors who are exempt from the homestead protection. Child support debts, condominium association dues, certain debts in bankruptcy filed by your spouse, and a few others.

The most important place that the homestead law has an effect is in bankruptcies. When homeowners are over their head in debt, many homeowners opt to stop paying other bills in order to continue with their mortgage payments. In other words, they stop paying unsecured debt, which they are protected from, to continue paying their secured debt, i.e mortgage, which they are not protected from.

Bankruptcy judges tend to be fairly lenient with the homestead exemption limit. In a bankruptcy court, the judge will let the homeowner keep their house if their mortgage payments are not delinquent and the equity in their home is $125,000 or less.

If your only asset is the equity in your home of $125,000 or less, the homestead law would most likely discourage someone from suing you. It may allow you to keep your home if you wind up in bankruptcy court. Declaration of Homestead would give you much more security.However, it will not protect you from all of your creditors.

If you are facing increasing debt, buying a new home, or have more questions regarding the Homestead Act, please contact Black and Buono in Framingham, MA.

In March 2009, the Obama administration launched the Home Affordable Modification Program (HAMP) which promised to keep 3-4 million struggling families in their home. To date, the HAMP program actually helped about half a million. Treasury Secretary Timothy Geithner has acquiesced the program will not meet the numbers promised.

On March 16, 2011, the Congressional Oversight Panel (COP) released its final report.

Within the report released December 14, 2010, the COP reported, “In April 2010, in its most recent report on Treasury’s foreclosure prevention programs, the Panel raised serious concerns about the timeliness, accountability, and sustainability of Treasury’s efforts. The Panel also noted “It now seems clear that Treasury’s programs, even when they are fully operational, will not reach the overwhelming majority of homeowners in trouble…. Treasury is still struggling to get its foreclosure programs off the ground as the crisis continues unabated.”

The report’s conclusion of the success of the HAMP was brutal yet honest. “The Panel now estimates that HAMP will prevent only 700,000 to 800,000foreclosures – far fewer than the 3 to 4 million foreclosures initially promised, and vastly fewer than the 8 to 13 million foreclosures expected by 2012.”

“In particular, banks typically hire loan servicers to handle the day-to-day management of a mortgage loan, and the servicer’s interests may at times sharply conflict with those of lenders and borrowers.”

“For example, although lenders suffer significant losses in foreclosures, the loaning institution can turn a substantial profit from foreclosure-related fees. As such, it may be in the bank’s interest to move a delinquent loan to foreclosure as soon as possible.”

“Another major obstacle is that many borrowers have second mortgages from lenders who could profit by blocking the modification of a first mortgage. Therefore, HAMP’s straightforward plan to encourage modifications has proven ineffective in practice.”

The report provides an answer to why most HAMP applicants have had the same paperwork requested several times by the same lender during their loan modification approval process without reasonable explanation.

The COP report concludes that the real problem with the HAMP approval process may have been that “Treasury has also failed to hold lending banks accountable when they have repeatedly lost borrower paperwork or when they have refused to perform loan modifications.”

The Panel communicated had several more concerns and made suggestions to the Treasury for improvements. This feedback was ignored. COP concluded, “many billions of dollars set aside for foreclosure mitigation may be left unused. As a result, an untold number of borrowers may go without help – all because Treasury failed to acknowledge HAMP’s shortcomings in time.”

The COP offers now that at least there should be learning from mistakes in developing any further programs. “Future policymakers should be mindful that the incentives of mortgage lenders are different from those of the government, and design any foreclosure mitigation program with that reality in mind.”

Truer words could not have been spoken by the COP. Those that work in housing related industries do understand the problem from the perspective of real world everyday business workings unlike those who are making policy in Washington D.C.

The fact is that the federal government penalizes anylender that actually agrees to reduce a borrower’s principal amount or even lower their interest rate. In the past, when a financial institution purchased a mortgage on the secondary market and modified the loan, the homeowner was taxed on the debt that was forgiven, and the financial institution was taxed on the difference between the purchase price of the loan and the new modified face amount. Because of this, mortgages were rarely, if ever, modified.

Because of the housing crisis, the tax on homeowners was eliminated, but the tax on the lender was left untouched. This has become a very real deterrent to modification, and almost half of all mortgages modified since 2005 have re-defaulted within a year of modification.

It only stands to reason that if this tax is eliminated, the number of modifications will increase, and the number of foreclosures will decrease.

In reality, those institutions providing loans really don’t want to take over the titles homes. They would much prefer to figure out a way to keep people in their homes and get the loan performing again. This takes a lot of time and personal attention however, which larger loan institutions simply cannot handle. Large banks and lenders do not have the resources to meet with each homeowner and evaluate their ability to pay. People in trouble need to work with individuals who specialize in this process. There is a difference between homeowners that can actually afford to stay in their homes and those that cannot.

Original article written By Brenda Krueger Huffman-and can be read at AXcess News